Exam Feedback November 2015 Part 2 FRM Exam Feedback

[Paranoid Panda]

No.


The real thing is that the equity / overcollateralized account can be structured on many different ways (The structuring agent can make it the way he wants)
So the question again is useless in my opinion.

Honestly havent heard of cashflows bypassing OC to equity . Yes indentures do specify that if the OC ratio test and triggers are satisfied cash flows can start being diverted from the OC account but thats generally towards defferred interest payments or principal repayments for senior and mezz notes etc and with a lot of If-Then conditions in the waterfall...Haven't seen that happening in the case of equity ..anyhow the feedback email is here looking forward to sharing my opinion with the team.

 

[Twol84]

No.


The real thing is that the equity / overcollateralized account can be structured on many different ways (The structuring agent can make it the way he wants)
So the question again is useless in my opinion.

That's just not true. The assigned reading alone has a very clear example of how the excess spread builds loss reserves before distribution to equity tranches. Typical CLOs have carry spreads of 300-400 bps. If this isn't used to build reserves, do you realise how profitable holding the equity tranche is likely to be? GARP doesn't word a lot of questions properly, but you could have gotten this right by covering Malz's chapter in greater detail.

Sorry for coming across as harsh, but blaming Garp for going with something that is done pretty commonly in both the literature and the market isn't constructive. Blame them for something worthwhile, like not providing erasers.

 

[babyik]

that was an easy one with the simple formula you've wrote

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Agree. i just wanted to contribute to only 60/80 questions by adding 61st...lol

 

[Paranoid Panda]

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Agree. i just wanted to contribute to only 60/80 questions by adding 61st...lol

Do we really have 60??? Its not adding up for me ...just remembered another question about the liquidity cost not adding up for 2 traders in singapore and hongkong ..it was about endogenous or exogenous liquidity and something cant recollect now

 

[a.lesnar]

I have marked sponsor risk for this one...the problem is, that the wording was completely misleading and the answers were too long and also ... I do not know....such a pity...

In facts yes all is dependent on the semantics of the question, I have also answered policy-mix like Abhirup_2015 since the two analysts were discussing the emerging market opportunity as an asset class, they were investing passively without selecting specific countries or titles.
However it is in my view clear that there is also sponsor risk and eventually also funding risk within these circumstances, so really what is decisive is the subjective interpretation.
In any case I appreciate that we can discuss the questions after the exam, this is relevant in my view.

 

[Toy]

Twol84 wrote:

"Sorry for coming across as harsh, but blaming Garp for going with something that is done pretty commonly in both the literature and the market isn't constructive. Blame them for something worthwhile, like not providing erasers."

I agree. I think this problem is clear. I missed some straightforward questions that I expected to be able to solve, like Jensen Inequality and the delta of call and put. This is completely down to me, nothing to do with Garp. I think this is another very clear question if one prepared for it and is consistent with examples in the assigned reading.

 

[babyik]

Do we really have 60??? Its not adding up for me ...just remembered another question about the liquidity cost not adding up for 2 traders in singapore and hongkong ..it was about endogenous or exogenous liquidity and something cant recollect now

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Have aggregated the questions posted by different users including mine into a docx file [ uploaded] . The answers are indicative [ may not be correct]. The questions may be loosely worded but i trust will help you guys recall the question. You may add the questions which have been missed.

 

[Paranoid Panda]

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Have aggregated the questions posted by different users including mine into a docx file [ uploaded] . The answers are indicative [ may not be correct]. The questions may be loosely worded but i trust will help you guys recall the question. You may add the questions which have been missed.

Thanks you are the real MVP hahaha

 

[babyik]

Thanks you are the real MVP hahaha

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ha ha ..everyone is MVP or have an alpha coz each one of us has contributed...lets hope we all have a good time on 5 jan 2016

 

[krenate]

That's just not true. The assigned reading alone has a very clear example of how the excess spread builds loss reserves before distribution to equity tranches. Typical CLOs have carry spreads of 300-400 bps. If this isn't used to build reserves, do you realise how profitable holding the equity tranche is likely to be? GARP doesn't word a lot of questions properly, but you could have gotten this right by covering Malz's chapter in greater detail.

Sorry for coming across as harsh, but blaming Garp for going with something that is done pretty commonly in both the literature and the market isn't constructive. Blame them for something worthwhile, like not providing erasers.

I mostly disagreee with you.... regarding with OC, actually, I cannot remember, that I have marked, but it should be allocated to senior, mezanine, equity and only afterwards to trust fun

That's just not true. The assigned reading alone has a very clear example of how the excess spread builds loss reserves before distribution to equity tranches. Typical CLOs have carry spreads of 300-400 bps. If this isn't used to build reserves, do you realise how profitable holding the equity tranche is likely to be? GARP doesn't word a lot of questions properly, but you could have gotten this right by covering Malz's chapter in greater detail.

Sorry for coming across as harsh, but blaming Garp for going with something that is done pretty commonly in both the literature and the market isn't constructive. Blame them for something worthwhile, like not providing erasers.

_______________________________________________________________________________________________

Have aggregated the questions posted by different users including mine into a docx file [ uploaded] . The answers are indicative [ may not be correct]. The questions may be loosely worded but i trust will help you guys recall the question. You may add the questions which have been missed.

thanks a lot, however, it is not adding up for me as well

 

[Esbringa]

That's just not true. The assigned reading alone has a very clear example of how the excess spread builds loss reserves before distribution to equity tranches. Typical CLOs have carry spreads of 300-400 bps. If this isn't used to build reserves, do you realise how profitable holding the equity tranche is likely to be? GARP doesn't word a lot of questions properly, but you could have gotten this right by covering Malz's chapter in greater detail.

Sorry for coming across as harsh, but blaming Garp for going with something that is done pretty commonly in both the literature and the market isn't constructive. Blame them for something worthwhile, like not providing erasers.

From Schwesser notes:

 

[Esbringa]

And another example when the structure ends:

 

[Twol84]

Read Malz. And Fabozzi. They both have google books that speak about this. I'm not sure what Schweser was saying in the example, but this is how I know it to typically work in the market and in prominent literature. If the assigned reading takes o/c to happen before excess spreads are paid to equity, you can be sure that going with Schweser over the reading is going to net you a wrong answer.

 

[Sidewinder]

FRM Credit Risk Measurement and Management, Side 184: "Once we know how much excess spread, if any, flows into the overcvollateralization account at the end of year t, we can determine how much cash flow to the equity note holders at the end of year t. The Equity Cash flow is Max (Lt - B - OCt, 0). Obviously, there is no cash flow to equity prior to maturity unless there is positive excess spread"

 

[Vishwa]

First of All, Good Luck with results on 1st week of Jan.

I felt part-2 exam neither easy nor complex, Managed to attempt all 80 questions. Few of qualitative questions were tricky and difficult to final answer.

I felt questions on VaR, Basel-3, Société Générale, LVar comparatively easy.

Btw, Which one did you choose for Estimated Operational loss to be reported (It was my 1st Question)

Q. A company has met with fire accident and all the building is damaged including the equipment. what amount would be correct to report as operational loss.

Not sure of the order of Answers provided. it goes like below

A) The cost of rebuilding the building & equipment ..etc
B) Book Value of the building & equipment minus estimated recovery from insurance
C) Book Value of the building & equipment
D) Book Value the building & equipment cost including insurance premium

I choose option C

 

[Sidewinder]

FRM Operational and Integrated Risk Management, Side 44: " Measures of the gross loss amount: Mark-to-Market or Replacement Cost" - about Replacement Cost: " the economic capital of an operational risk loss usually differs from the accounting impact when losses affect assets or accounts that are not maintained on a mark-to-market basis such as property, plant...The gross loss amount is the replacement cost of the item. Replacement cost means the cost to replace an item or to restore to its pre-loss-condition"

Btw: Im pretty sure that one answer included something with "Replacement Cost"...

 

[HERO]

One more question. The assets allocation... how much of the portfolio return can be attributed to assets allocation? We have now 61 questions.

 

[krenate]

for me it is not adding up anyway... I am afraid that I need to retake the exam

 

[VuX]

I have a small request to everyone. If you guys can please tell how much you are expecting to score on an average? It will give a rough indication on where everyone of us are standing, atleast here on forum. Please if you all can give your rough estimate of scores. I think mine will be approximate 50. Request you all to please post yours.

 

[krenate]

I have a small request to everyone. If you guys can please tell how much you are expecting to score on an average? It will give a rough indication on where everyone of us are standing, atleast here on forum. Please if you all can give your rough estimate of scores. I think mine will be approximate 50. Request you all to please post yours.

congrats, passed... me 25+